Construction on the new Wembley Stadium was projected as taking three years and costing £458 million; it took seven and cost more than twice that. The Scottish Parliament Building’s initial estimated costs were around £40 million; final costs were over ten times that. Estimated visitor numbers at the Millennium Dome were 12 million, but only half this number came, meaning that £600 million of lottery money was needed, instead of the £400 million original estimated.

These are just the high-profile cases, but the list of similar overshoots is very long. Our instant reaction is often to focus on how the projects were implemented, but the biggest failure in these and many other cases occurs not in implementation but in planning. In each of these cases and many more, planners fell victim to a natural human tendency: the Planning Fallacy. The chances are that you fall for it too, but it can be avoided, leading to better decision-making and avoiding habitual overruns.

The Inside View

Nobel Prize winner Daniel Kahneman coined the term ‘Planning Fallacy’ to refer to the seemingly hard-wired tendency in people to take what he calls the inside view when estimating costs, timelines and other elements of a project. Try it now. Make a quick estimate of time and cost for a project or change at work. Choose something you’ve been thinking about as something that would improve things, and make a rough guess at costs and timelines before you read on.

The interesting thing is not the figure you arrived at, but how you got there. If you’re like the vast majority of people, you looked for relevant experience in your memory and extrapolated from that. Let’s say I’ve designed and tested a training course for a client, and I want to estimate costs and timescales to design and implement a suite of similar courses. Using the inside view, I would take the time and cost from the single course and upscale, multiplying it by ten for ten courses. If I’m cautious, I might add 10% for the unexpected.

But adding an arbitrary figure on for the unexpected is a basic error. Wembley Stadium’s unexpected costs were 100% of the original budget. The Scottish Parliament’s were over 900%! Different projects meet different unknowns. The unknowns are themselves unknown. From our inside view, we can’t know what will come up. Of course, Wembley and the Millennium Dome are larger and more complex than the projects most of us deal with, but while the scale may be different, the extent to which costs and timescales overshoot estimates can vary equally wildly on projects at all levels.

The Outside View

A better way to estimate is to take the outside view. First find a baseline, and then estimate to what extent your project will vary from it. For Wembley Stadium, planners could have looked at similar projects and found statistics for the costs of each. Every project is different, so it can be useful to frame the figures in a relevant way; a stadium might be looked at in terms of cost per capacity, for instance. Your estimate should then be based on the average, adjusted according to how much better or worse than it you expect your case to be.

Wembley might have considered factors like readiness of the site, transport links for construction materials, and the fact that the Wembley arch was an innovative and untried design. Combining these factors and comparing with the projects that gave them their baseline could have given them an idea whether they could expect their project to be more or less costly than those projects’ average. Even if they didn’t want to work out their whole budget from this, they could have estimated costs as usual and then looked at the average cost overrun for similar projects as a baseline, adjusting it according to whether they would be better or worse than average on that score, and adding the result to the budget as a reserve.

In my own example, I would have been better off getting information about larger training programmes’ costs and timescales, and then asking myself whether I was likely to be in a better or worse position. This means that the percentage I’m adding on for unknown unknowns is based on real life, not arbitrary guesswork. If I was designing new materials, and had a difficult client who often moved the goalposts, I might decide I was likely to do worse than the baseline. Given a free rein and working around established topics, I might decide that I was likely to do better. There is still some arbitrary judgement here, but it is now anchored to a baseline drawn from historical information.

Avoiding the Planning Fallacy

Taking the outside view results in much more accurate plans and estimates than taking the inside view. There are two traps here: one is to think that examples such as those we’ve shown involve experts who ‘must know what they’re doing’. The Planning Fallacy is a very human thing. A 2005 study that looked at rail projects between 1969 and 1998 found that passenger numbers were overestimated in nine of every ten projects, by an average of 106%. Although these figures were widely publicised, these results did not improve over that thirty-year period.

The second trap is to think the Planning Fallacy does not apply to you. The people at the head of these rail projects were specifically given the task of planning; presumably in most cases it was for a good reason. They were human, and they fell for the Planning Fallacy; unless you do things differently, you will too. The next time you’re planning a project, look around for information on comparable cases, and consider how your project differs from them. If you can do that, you stand a good chance of avoiding the planning fallacy and making plans and estimates that you can rely on.